Show Transcript
The U.S. Federal Reserve kept its key interest rate on hold near zero, but warned the pace of the economic recovery has “moderated in recent months.” Anthony Okolie speaks with Scott Colbourne, Managing Director, TD Asset Management, about what this means for markets.
Print Transcript
- As expected, the Federal Reserve left rates unchanged in the first meeting of 2021. But Scott, what got your attention today?
- Yes. Good question. I mean, Anthony, today really there was no expectation of any change or just some minor tweaks to the statement, and that's what we got. The Fed made some sort of, if you will, mark to market to the acknowledgment that the US economy is a little slower. And at the end of the day, it's really not much of a surprise.
And, really, the Fed is not trying to make any changes and pushing off any notion of tapering or Fed hikes way into the future. So that was not a surprise, and the markets are going to be used to a very accommodative Fed for a while.
- And I want to talk a little bit about the equity markets, if I could. I want to get your thoughts on the retail buying frenzy that we've seen and the record leverage, really, in positions in stocks like GameStop and AMC. Is this something that the Federal Reserve can address, this speculation, or is it something left for the regulators?
- Yeah, I really think that the Fed is not going to focus on this at all. There's lots of chatter perhaps about this activity being a byproduct of the Fed policy or central-bank policies, which is-- that's fine to discuss. But at the end of the day, I think if there is anything to be looked at, it's from a regulatory point of view.
And honestly, I think from a regulatory point of view, all regulations have been centered around protecting the small investor and not the big investor. And in this case, the small investor's taking on the big investor. So I honestly think the markets are going to be left alone, and we're all going to be just watching this fascinating activity in the market, at the end of the day.
- Great perspective there. I'll switch back to bonds. Now we've seen long-term bond yields have risen. There's a lot of optimism that the Biden administration, that they've proposed this huge $1.9 trillion package. How likely is it that the Fed can maintain this lower-for-longer rate policy as we start to see bond yields creep up over time?
- The broad theme that's at play that investors have been watching and investing on is this reflationary trend, right? And we're all focused on the progress-- as the Fed stated today, the progress on the vaccine-- on the virus and the course of the virus and the progress on vaccination. So that's really going to drive the trajectory of the market, and certainly the stimulus that you're pointing out is going to be a tailwind as well.
So what does it mean for the shape of the yield curve? It's broadly been steepening. That is, the longer end has been selling off more than the short end as the central banks have been anchoring it.
As the progress continues and as we gain confidence in the recovery, there is speculation in the market that, where do we go from here? And it's an interesting topic, this whole notion of tapering. We had a little bit of an acknowledgment of tapering out of the Bank of Canada. We saw some hawkish minutes out of the Bank of Brazil. And certainly today Fed Governor Powell is going to be pressed on this notion of tapering because some regional Fed governors have introduced that line of thinking.
Now, all central banks are pushing back against this. They all want to raise rates well off into the future. So it's an activity that we'll be looking at over the next couple of years, but central banks are definitely pushing back. They definitely want to keep financial conditions very accommodative for a long period of time where we're in a new policy regime as well, average inflation targeting by the Fed.
So all in all, from an investor's point of view, look for a very accommodative Fed and central banks for a long period of time and the occasional tweaking or market-challenging central bankers as to this notion of tapering but well off into the future.
- And talk to us a little bit about the US corporate debt market, which we've seen increasing significantly over the past year. Do you think this is an area of risk for the US economy?
- No. I think it's not an area of risk. Certainly corporations have definitely taken advantage of the cheap level in corporate spreads as well as the absolute level of yields to refinance their balance sheets. As investors, we have to characterize the risks of the corporations that we invest in, and certainly there are more BBB investments out there than there have in the past. In some indices, they're up to 50% of the index, are in BBB.
So that's just an area that we as investors have to mark to market. But from a systemic point of view, it's not a risk, and it's actually behavior that one would expect out of corporations, to take advantage of low yields.
- And just quickly, given this low rate environment, where do you see the US dollar going over the next little while?
- Again, this reflationary trend and theme-- low rates, low absolute rates on a global basis, particularly in the US. So it's a bit of a headwind for the US dollar. We continue to see the stimulus, fiscal/monetary policy contributing to global growth. And in that environment, it's typically good for currencies outside of the US.
And so broadly speaking, a weak US dollar is the trend that we should expect over the next little while with these occasional periods of marking to market and position squaring. But the broad trend is for a weaker US dollar and, in that end, a slightly stronger Canadian dollar.
- Scott, thank you very much for your time.
- My pleasure. Great to see you.
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- Yes. Good question. I mean, Anthony, today really there was no expectation of any change or just some minor tweaks to the statement, and that's what we got. The Fed made some sort of, if you will, mark to market to the acknowledgment that the US economy is a little slower. And at the end of the day, it's really not much of a surprise.
And, really, the Fed is not trying to make any changes and pushing off any notion of tapering or Fed hikes way into the future. So that was not a surprise, and the markets are going to be used to a very accommodative Fed for a while.
- And I want to talk a little bit about the equity markets, if I could. I want to get your thoughts on the retail buying frenzy that we've seen and the record leverage, really, in positions in stocks like GameStop and AMC. Is this something that the Federal Reserve can address, this speculation, or is it something left for the regulators?
- Yeah, I really think that the Fed is not going to focus on this at all. There's lots of chatter perhaps about this activity being a byproduct of the Fed policy or central-bank policies, which is-- that's fine to discuss. But at the end of the day, I think if there is anything to be looked at, it's from a regulatory point of view.
And honestly, I think from a regulatory point of view, all regulations have been centered around protecting the small investor and not the big investor. And in this case, the small investor's taking on the big investor. So I honestly think the markets are going to be left alone, and we're all going to be just watching this fascinating activity in the market, at the end of the day.
- Great perspective there. I'll switch back to bonds. Now we've seen long-term bond yields have risen. There's a lot of optimism that the Biden administration, that they've proposed this huge $1.9 trillion package. How likely is it that the Fed can maintain this lower-for-longer rate policy as we start to see bond yields creep up over time?
- The broad theme that's at play that investors have been watching and investing on is this reflationary trend, right? And we're all focused on the progress-- as the Fed stated today, the progress on the vaccine-- on the virus and the course of the virus and the progress on vaccination. So that's really going to drive the trajectory of the market, and certainly the stimulus that you're pointing out is going to be a tailwind as well.
So what does it mean for the shape of the yield curve? It's broadly been steepening. That is, the longer end has been selling off more than the short end as the central banks have been anchoring it.
As the progress continues and as we gain confidence in the recovery, there is speculation in the market that, where do we go from here? And it's an interesting topic, this whole notion of tapering. We had a little bit of an acknowledgment of tapering out of the Bank of Canada. We saw some hawkish minutes out of the Bank of Brazil. And certainly today Fed Governor Powell is going to be pressed on this notion of tapering because some regional Fed governors have introduced that line of thinking.
Now, all central banks are pushing back against this. They all want to raise rates well off into the future. So it's an activity that we'll be looking at over the next couple of years, but central banks are definitely pushing back. They definitely want to keep financial conditions very accommodative for a long period of time where we're in a new policy regime as well, average inflation targeting by the Fed.
So all in all, from an investor's point of view, look for a very accommodative Fed and central banks for a long period of time and the occasional tweaking or market-challenging central bankers as to this notion of tapering but well off into the future.
- And talk to us a little bit about the US corporate debt market, which we've seen increasing significantly over the past year. Do you think this is an area of risk for the US economy?
- No. I think it's not an area of risk. Certainly corporations have definitely taken advantage of the cheap level in corporate spreads as well as the absolute level of yields to refinance their balance sheets. As investors, we have to characterize the risks of the corporations that we invest in, and certainly there are more BBB investments out there than there have in the past. In some indices, they're up to 50% of the index, are in BBB.
So that's just an area that we as investors have to mark to market. But from a systemic point of view, it's not a risk, and it's actually behavior that one would expect out of corporations, to take advantage of low yields.
- And just quickly, given this low rate environment, where do you see the US dollar going over the next little while?
- Again, this reflationary trend and theme-- low rates, low absolute rates on a global basis, particularly in the US. So it's a bit of a headwind for the US dollar. We continue to see the stimulus, fiscal/monetary policy contributing to global growth. And in that environment, it's typically good for currencies outside of the US.
And so broadly speaking, a weak US dollar is the trend that we should expect over the next little while with these occasional periods of marking to market and position squaring. But the broad trend is for a weaker US dollar and, in that end, a slightly stronger Canadian dollar.
- Scott, thank you very much for your time.
- My pleasure. Great to see you.
[MUSIC PLAYING]
